Canadian Dollar Forecast: USD/CAD Snaps Back to Support, What's Next?

Canadian Dollar, USD/CAD Talking Points:

• It was pandemonium after this week’s open in USD/CAD with the pair quickly jumping up to a fresh 20-plus year high before snapping back.
• On Monday a temporary truce helped to bring even more pullback to the pair, and this goes along the lines with the potential for mean reversion in the pair. But importantly, tariffs were delayed and not eliminated so bulls aren’t necessarily done for yet.
• The pullback has so far found support at the same zone that held the lows after the false breakout at 1.4500, but sellers haven’t relented yet. Tomorrow’s NFP and Canadian jobs reports are the next major push point for the pair.
• If tariffs do come into play, the Canadian Dollar could see even more vulnerability as Canadian officials have pledged ‘pandemic-like support’ for the economy, which would likely mean more borrowing that could lead to an even weaker CAD. As looked at previously, a weak currency can lead to higher inflation such as we’ve started to see in Canada.

In Friday’s article I warned of rampant volatility after the open in USD/CAD and that’s precisely what we saw. With U.S. tariffs on Canada set to come into effect on Saturday and President Trump holding the line on the matter with a very busy day of headlines on Friday, the low liquidity backdrop that often shows around weekly opens appeared vulnerable for wild swings in the Canadian Dollar.

On Sunday USD/CAD opened to fresh 20-plus year highs, trading above the 1.4700 level for the first time since 2003. And while the first couple hours after the Sunday opened showed a mild pullback, support held at prior resistance, from the 2016 high of 1.4690, before another fresh high showed.

By the time U.S. markets opened on Monday morning the pair had receded back to the 1.4668-1.4690 zone that I had looked at in the last article. But it was the pushing back of tariff implementation that ultimately drove the pullback in the pair, as it was announced that tariff implementation would be delayed by a month after a conversation between President Trump and Justin Trudeau.

From President Trump’s social media accounts, he said that tariffs were “paused for a 30-day period to see whether or not a final Economic deal with Canada can be structured.”

From Trudeau’s social media, it sounded more final as he said that Canada would spend $1.3 billion on a plan to reinforce the border with new helicopters and personnel, while adding resources to stop the flow of fentanyl. But this wasn’t really ‘new’ news as Canada had made that announcement at the end of 2024.

So, pertinent to traders is whether we see a re-flaring of the drama in approximately 25 days when that deadline comes forth.

From the monthly chart, this aligns with what I’ve been tracking over the past few months, as the tariff topic has dominated the headlines in USD/CAD. The pair retains potential for mean-reversion, holding within the range that’s been in-play for the past nine years. For this to continue – we’re likely going to need to see some form of an economic deal reached, as President Trump has alluded to.

USD/CAD Monthly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

While the media seems bullish on Canada’s prospects in a trade war type of dispute, it seems as though they may have quite a bit to risk from this scenario should a prolonged tariff situation take place. That can lead to higher prices in USD/CAD and a weaker Canadian Dollar, which could push inflation levels higher, as we’ve already started to see with the example around Tesla only a couple weeks ago.

Adding to that – Canadian officials have already pledged ‘pandemic-like support’ for the economy should tariffs come into place. This would likely be financed with debt, which would lead to more monetary dilution, an even weaker Canadian Dollar, and even higher spot prices in USD/CAD. That similarly would add an upper push for inflation.

A situation like that could fast spiral into a dangerous scenario and it seems like something that Canadian officials would want to avoid.

As I’ve discussed in the past, I think it would also be the preference of President Trump for this range to continue, as a strong U.S. Dollar could act as a drag on U.S. economic growth, particularly if that strength is taking place against the Canadian Dollar. But, as we saw on Friday when the report was walked back that tariffs will be delayed, he doesn’t seem afraid of the prospect of a continued fight on the matter of tariffs.

There was a similar scenario playing out just a few weeks ago, as Trump had pledged that tariffs would begin on ‘day one’ of his administration. Naturally, the day after his inauguration, USD/CAD spiked up to 1.4500 for its first test above the psychological level, but as tariffs were delayed until February 1^st, the pair snapped back and held support at the same 1.4280-1.4300 zone that was previously in-play. And that held until last week’s rally to a fresh high.

So, with tariffs delayed, there’s been motive for profit taking and prices have pulled back to the same 1.4280-1.4300 zone of support. From the weekly chart, USD/CAD is working on a sizable bearish engulfing pattern.

Whether that comes to fruition, however, will depend on a highly important Friday with both U.S. and Canadian jobs reports, as I’ll look at below.

USD/CAD Weekly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/CAD into Employment Reports

Investors generally abhor uncertainty, and they’ll often respond to that with risk aversion. While there was and still is to a great degree, uncertainty around Canadian tariffs, the response in price action has been clearer as USD/CAD prices have pushed up to that fresh 20-plus year high. And as looked at previously, there could be continued bullish drive here, as the topic of tariffs is not completely off-the-table and, instead, we have a mere delay.

Whether that delay turns into anything more, from President Trump’s comments, at least, it seems will be determined as to whether some form of economic deal can be reached between the two countries. This could give bulls reason to defend support, in anticipation of another possible re-flaring of tensions.

But there’s a lot of the month left until we get towards the end of that deadline and, at this point, support at 1.4280-1.4300 has held a couple of different bounces, including yesterdays.

High on the radar for near-term price action is the jobs reports due out of both Canada and the United States tomorrow at 8:30 AM ET. And frankly, given how volatile the pair has been of late, the range of possible scenarios is significantly wider than I’d normally expect.

If we do see motive for more profit taking in the longer-term move, both 1.4200 and 1.4100 are of interest, as the ladder level is a Fibonacci level that had previously helped to set the high for the pair just after the election.

If support can hold – and if prices can put in a bounce – 1.4400 and 1.4500 are the next obvious spots of reference, but I’d be careful with driving for bullish continuation if either of those come into play, at least at this early stage of the tariff scenario. A hold of resistance at 1.4400 could be of particular interest as that would constitute a lower-high inside of the 1.4500 swing-high from Tuesday, keeping the door open for a larger pullback in the pair.

USD/CAD Daily Price Chart

 Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist